Section 124 Customs Act | Right to Cross-Examination & Corroboration of Retracted Statements Mandatory for Confiscation : CESTAT Allahabad

The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Allahabad, has delivered a significant ruling on the procedural fairness of adjudication under the Customs Act, 1962. The Tribunal set aside an ex parte order imposing confiscation, penalties, and duty drawback demands, emphasizing the critical role of cross-examination rights and the reliability of retracted statements in quasi-judicial proceedings. The judgment underscores that allegations based solely on uncorroborated statements, particularly those retracted, cannot sustain adverse orders without independent evidence and adherence to procedural safeguards.

Background & Facts

The Dispute

The appeals arose from a common Order-in-Original dated 24.12.2020 passed by the Principal Commissioner of Customs, Noida, confiscating gold jewellery and bullion belonging to the appellants and imposing penalties under Sections 112, 114, 114A, and 114AA of the Customs Act, 1962. The order also demanded the repayment of duty drawback amounting to ₹61,90,422 allowed to M/s Shokeen Jewellers for exported gold jewellery. The appellants challenged the order on grounds of procedural irregularities, lack of evidence, and denial of natural justice.

Key Facts

• Appellants:

  • M/s Shokeen Jewellers Pvt. Ltd. (confiscation of 2.519 kg gold jewellery, demand of ₹61,90,422 duty drawback, penalties under Sections 112, 114, and 114AA).
  • Mr. Ajit Singh (penalties of ₹45 lakhs each under Sections 112 and 114, and ₹5 crores under Section 114AA).
  • Mr. Nishant Shokeen (penalties of ₹45 lakhs each under Sections 112 and 114).
  • M/s Raj Jewellers (confiscation of 13.324 kg gold jewellery and 12.769 kg gold bullion, demand of ₹4,53,14,714 under Section 28 with interest under Section 28AA, and penalties under Sections 114A and 114AA).

• Underlying Transactions:

  • M/s Shokeen Jewellers Pvt. Ltd. and M/s Raj Jewellers (SEZ unit) were engaged in manufacturing and exporting gold jewellery to buyers in the UAE.
  • M/s Raj Jewellers imported duty-free gold bullion under the SEZ scheme, manufactured jewellery, and exported it to fulfill export obligations.
  • M/s Shokeen Jewellers claimed duty drawback on exported jewellery, allegedly purchased from registered dealers under VAT laws.

• Alleged Modus Operandi:

  • The Directorate of Revenue Intelligence (DRI) received intelligence that M/s Raj Jewellers was diverting export-bound gold jewellery into the domestic market.
  • On 30.05.2017, Mr. Ashok Kumar Verma (proprietor of M/s Raj Jewellers) and Mr. Ajit Singh were intercepted at IGI Airport, Delhi. Mr. Ashok Kumar Verma was allegedly carrying export documents, while Mr. Ajit Singh was found in possession of 13.324 kg of gold jewellery meant for export.
  • The jewellery was seized under Section 110 of the Customs Act, and both individuals were arrested and produced before the Chief Metropolitan Magistrate (CMM), Patiala House Court, Delhi.

Procedural History

• 30.05.2017: Interception and seizure of gold jewellery at IGI Airport. Panchnama drawn, and statements recorded under Section 108 of the Customs Act.
• 30-31.05.2017: Search conducted at the premises of M/s Raj Jewellers (Noida SEZ) and M/s Shokeen Jewellers (Karol Bagh, Delhi). Gold bullion (3 kg) and gold jewellery (9.732 kg) seized from M/s Raj Jewellers; 2.519 kg gold jewellery seized from M/s Shokeen Jewellers.
• 09.06.2017: Mr. Ashok Kumar Verma and Mr. Ajit Singh retracted their statements while in judicial custody, alleging coercion.
• 28.11.2017 & 27.09.2019: Two Show Cause Notices (SCNs) issued to the appellants alleging diversion of export goods, misuse of SEZ scheme, and fraudulent duty drawback claims.
• 02-05.04.2018: Appellants filed interim replies denying allegations and requesting cross-examination of witnesses (Mr. Naresh Kumar Rana, Mr. Toofan Chandra Pradhan, Mr. Ajit Singh, Mr. Ashok Kumar Verma, and panch witnesses).
• 19.02.2019 & 18.08.2020: Hearings fixed but adjourned due to the Commissioner’s absence and COVID-19 restrictions. Appellants filed repeated requests for cross-examination and adjournments.
• 05.09.2020: Appellants filed a detailed reply on merits, reiterating requests for cross-examination.
• 24.12.2020: Ex parte Order-in-Original passed by the Principal Commissioner, confiscating goods, imposing penalties, and demanding duty drawback repayment.
• 2025-2026: Appeals filed before CESTAT Allahabad challenging the impugned order.

The Parties' Positions

For the Appellants

• Denial of Allegations: The appellants denied the recovery of jewellery from Mr. Ajit Singh, alleging that the contents of both bags (belonging to Mr. Ajit Singh and Mr. Ashok Kumar Verma) were mixed up during simultaneous opening, and the Panchnama was signed under compulsion.
• Procedural Infirmities:
  • The Panchnama dated 30-31.05.2017 was unreliable as panch witnesses were not present during the actual interception or alleged exchange of bags. The recovery was staged in the Customs Preventive Room, defeating the purpose of independent witnesses.
  • The alleged exchange of bags was factually impossible due to the segregation of domestic and international passengers post-security check at the airport.
  • The Department’s allegation of seven prior instances of bag exchange was unsubstantiated and improbable given airport security protocols.
• Retracted Statements: The statements of Mr. Ashok Kumar Verma and Mr. Ajit Singh were retracted at the earliest opportunity (while in judicial custody), alleging coercion. The Department failed to rebut these retractions or record further statements.
• Lack of Corroborative Evidence: The Department relied solely on uncorroborated statements without independent evidence (e.g., CCTV footage, financial records, or documentary proof of diversion).
• Denial of Cross-Examination: The appellants’ right to cross-examine witnesses (including panch witnesses and co-noticees) was denied without reasoned order, violating principles of natural justice and Section 138B of the Customs Act.
• Duty Drawback Claims: The duty drawback allowed to M/s Shokeen Jewellers was based on verified documents, including VAT-registered dealer invoices, bank transactions, and export realizations. The Department’s demand for repayment was vague and unsupported.
• Foreign Buyer Confirmations: Letters from foreign buyers (M/s Motiwala Jewellers LLC and M/s Al Salam Jewellery LLC) confirmed receipt of exported jewellery, except for one pending consignment. The Department’s reliance on a vague letter from the Controller General of India, Dubai, was misplaced.

For the Respondent (Revenue)

• Reliance on Statements: The Revenue relied on the statements of Mr. Ashok Kumar Verma, Mr. Ajit Singh, and other witnesses (e.g., Mr. Toofan Chandra Pradhan) to allege diversion of export goods and fraudulent duty drawback claims.
• Panchnama Evidence: The Panchnama drawn at IGI Airport was treated as conclusive evidence of the alleged exchange of bags and diversion of jewellery.
• Modus Operandi: The Revenue alleged that Mr. Ashok Kumar Verma and Mr. Ajit Singh exchanged bags in the departure lounge after security clearance, with Mr. Ajit Singh carrying the jewellery to Mumbai while Mr. Ashok Kumar Verma traveled to Dubai with only export documents.
• Duty Drawback Fraud: M/s Shokeen Jewellers allegedly obtained fake invoices from M/s Shree Ganesh Enterprises to claim inadmissible duty drawback.
• Non-Compliance with Export Obligations: M/s Raj Jewellers failed to export jewellery manufactured from duty-free gold bullion, diverting it instead to the domestic market.

Relief Sought

The appellants sought:

• Setting aside the impugned order dated 24.12.2020.
• Return of confiscated gold and gold jewellery.
• Quashing of penalties and duty drawback demands.
• Consequential benefits, including release of seized goods and documents.

The Legal Issue

The central legal questions before the Tribunal were:

1. Whether the adjudication proceedings under the Customs Act can sustain confiscation, penalties, and duty drawback demands solely on the basis of uncorroborated and retracted statements, without independent evidence or opportunity for cross-examination?
2. Whether the denial of cross-examination to the appellants violated principles of natural justice and Section 138B of the Customs Act, rendering the impugned order unsustainable?
3. Whether the Panchnama and recovery proceedings were reliable given the procedural infirmities and lack of corroboration?

Arguments Presented

For the Appellants

• Unreliability of Statements: The statements of Mr. Ashok Kumar Verma and Mr. Ajit Singh were retracted, and the Department failed to rebut these retractions or examine them during adjudication. Reliance on retracted statements without corroboration was unsustainable (Vinod Solanki v. Union of India, Commissioner v. Shakil Ahmad Khan).
• Denial of Cross-Examination: The appellants’ right to cross-examine witnesses (including panch witnesses and co-noticees) was denied, violating Section 138B of the Customs Act and principles of natural justice (Andaman Timber Industries v. CCE).
• Procedural Infirmities in Panchnama: The Panchnama was defective as panch witnesses were not present during the actual interception or alleged exchange of bags. The recovery was staged, lacking evidentiary value.
• Lack of Corroborative Evidence: The Department’s case was based on assumptions and presumptions without independent evidence (e.g., financial records, CCTV footage, or documentary proof of diversion).
• Foreign Buyer Confirmations: Letters from foreign buyers confirmed receipt of exported jewellery, contradicting the Department’s allegation of diversion.
• Duty Drawback Claims: The duty drawback allowed to M/s Shokeen Jewellers was based on verified documents, including VAT-registered dealer invoices and bank transactions. The Department’s demand for repayment was unfounded.

For the Respondent

• The Revenue relied on the Panchnama dated 30-31.05.2017 and statements of witnesses to allege diversion of export goods and fraudulent duty drawback claims.
• The modus operandi involved Mr. Ashok Kumar Verma and Mr. Ajit Singh exchanging bags in the departure lounge, with Mr. Ajit Singh carrying the jewellery to Mumbai while Mr. Ashok Kumar Verma traveled to Dubai with export documents.
• M/s Shokeen Jewellers allegedly obtained fake invoices to claim duty drawback, and M/s Raj Jewellers diverted duty-free gold jewellery to the domestic market.

The Court's Analysis

The Tribunal conducted a detailed analysis of the procedural and evidentiary aspects of the case:

1. Reliability of Statements:

   • The Tribunal noted that the key statements of Mr. Ashok Kumar Verma and Mr. Ajit Singh were retracted while in judicial custody at the earliest opportunity. The Department failed to rebut these retractions or examine them during adjudication.
   • The statements of Mr. Toofan Chandra Pradhan (Head Karigar) were contradictory, rendering them unreliable. The Tribunal emphasized that allegations cannot be sustained solely on statements without independent corroboration (Vikram Cement Private Limited v. Commissioner of Central Excise).
   • The Tribunal relied on Supreme Court precedents (Vinod Solanki v. Union of India, Commissioner v. Shakil Ahmad Khan) to hold that retracted statements cannot form the sole basis for adverse orders without corroborative evidence.

2. Denial of Cross-Examination:

   • The appellants’ right to cross-examine witnesses (including panch witnesses and co-noticees) was denied without reasoned order, violating Section 138B of the Customs Act and principles of natural justice.
   • The Tribunal cited Andaman Timber Industries v. CCE to emphasize that cross-examination is essential to test the veracity of statements relied upon by the Department. The denial of this right rendered the reliance on such statements unsustainable.

3. Procedural Infirmities in Panchnama:

   • The Panchnama dated 30-31.05.2017 was found unreliable as the panch witnesses were not present during the actual interception or alleged exchange of bags. The recovery was staged in the Customs Preventive Room, defeating the purpose of independent witnesses.
   • The Tribunal noted that the alleged exchange of bags was factually impossible due to the segregation of domestic and international passengers post-security check at the airport.

4. Lack of Corroborative Evidence:

   • The Department’s case was based on assumptions and presumptions without independent evidence (e.g., financial records, CCTV footage, or documentary proof of diversion).
   • The Tribunal observed that no payment to providers of gold through Hawala or other illegal channels was brought on record, undermining the allegation of diversion.

5. Duty Drawback Claims:

   • The duty drawback allowed to M/s Shokeen Jewellers was based on verified documents, including VAT-registered dealer invoices, bank transactions, and export realizations. The Department’s demand for repayment was vague and unsupported.
   • The Tribunal noted that the seller of gold jewellery (M/s Shree Ganesh Enterprises) was duly registered with the VAT Department and had filed returns declaring transactions with M/s Shokeen Jewellers.

6. Denial of Opportunity of Hearing:

   • The Tribunal criticized the ex parte order passed without considering the appellants’ interim and final replies to the SCNs.
   • The appellants’ requests for cross-examination and adjournments (due to COVID-19) were ignored, violating the Board’s Master Circular No.1053/2/2017 dated 10.03.2017 and instructions for video conferencing hearings.

"The whole case of the Revenue have been made on the basis of statements which are not reliable. The key statements of Mr. Ashok Kumar Verma and Mr. Ajit Singh have been retracted by them while in judicial custody at the 1st available opportunity. Such retractions have neither been rebutted by the Revenue, nor such persons were summoned for recording of further statements. Neither they were examined in Adjudication proceedings. Further, there is no corroborative evidence in support of the statement of these persons."

The Verdict

The Tribunal set aside the impugned order dated 24.12.2020 and allowed all four appeals. The appellants were entitled to consequential benefits, including the return of confiscated gold and gold jewellery. The Tribunal held that:

• The confiscation, penalties, and duty drawback demands were unsustainable due to reliance on uncorroborated and retracted statements.
• The denial of cross-examination violated principles of natural justice and Section 138B of the Customs Act.
• The Panchnama and recovery proceedings were unreliable due to procedural infirmities and lack of corroboration.
• The allegations of diversion and fraudulent duty drawback claims were unsubstantiated and vague.

What This Means For Similar Cases

Right to Cross-Examination Is Non-Negotiable

• Quasi-judicial authorities must strictly adhere to Section 138B of the Customs Act, which mandates the examination of witnesses and opportunity for cross-examination in adjudication proceedings.
• Denial of cross-examination without reasoned order renders the proceedings void ab initio, as held in Andaman Timber Industries v. CCE.
• Practitioners should insist on cross-examination of all witnesses relied upon by the Department, including panch witnesses, to test the veracity of allegations.

Retracted Statements Cannot Sustain Adverse Orders

• Retracted statements lose evidentiary value unless rebutted by the Department or supported by independent corroboration.
• Judicial custody retractions carry significant weight, and the Department must re-examine witnesses or provide corroborative evidence to sustain allegations (Vinod Solanki v. Union of India).
• Contradictory statements (e.g., of co-noticees or Department witnesses) further weaken the Department’s case.

Procedural Compliance Is Mandatory

• Panchnamas and recovery proceedings must be conducted in the presence of independent witnesses throughout the process, not merely at the fag end.
• Ex parte orders passed without considering replies or granting opportunities for cross-examination are liable to be set aside.
• COVID-19 restrictions do not absolve authorities of their duty to grant fair hearings, including video conferencing options as per Board instructions.

Corroborative Evidence Is Essential

• Allegations of diversion, fraud, or smuggling must be supported by independent evidence (e.g., financial records, CCTV footage, or documentary proof).
• Foreign buyer confirmations and VAT-registered dealer invoices can rebut allegations of diversion or fraudulent duty drawback claims.
• Vague and unsubstantiated allegations (e.g., reliance on a non-specific letter from a consulate) cannot sustain confiscation or penalties.